SINGAPORE (Sept 3): For nearly three weeks in August, the drama of electric car and energy storage firm -Tesla going private had dominated the business headlines. Did maverick CEO Elon Musk really have the “funding secured” as he claimed in his tweet? Or was it just a tactic to throw Tesla short sellers off balance? On Aug 24, Musk made another sharp U-turn, declaring he had decided to keep Tesla as a publicly listed firm because that was what most shareholders wanted. On Aug 27, -Toyota Motor announced it would take a US$500 million ($682.8 million) stake in ride-hailing giant Uber. The Japanese auto colossus, which has lagged behind other companies in electric, autonomous and connected cars, already has a US$1 billion stake in Southeast Asian ride-hailing firm Grab.
What do Tesla’s travails and Toyota’s investments in Uber have in common? Think “Mobility as a Service” or MaaS. It is not about selling cars anymore but increasingly, about selling a subscription service, to move people from one place to another. Nomura estimates the total addressable MaaS market to be US$400 billion to US$600 billion by 2025.
To be sure, the auto industry is undergoing a dramatic transformation that has upended its traditional business model of designing, branding, manufacturing and selling cars. Indeed, sales of passenger cars worldwide, which peaked at about 100 million units a few years ago, have been declining. In North America, the number of young people with a driving licence — long a rite of passage — has fallen to its lowest level in almost three decades. Young North Americans are happy to pedal, take public transport or Uber around instead of buying their own car.
The future of autos is electric, connected, autonomous and shared rather than individually owned cars with an internal combustion engine. Battery-powered electric vehicles (EVs), once a novelty, are gaining traction in China and are likely to reach an inflection point in the second half of next year in Europe and probably 2020 in North America. The boom in electric cars is driven not just by oil prices — which are up from a low of US$25 a barrel in February 2016 to US$69 this past week — but also due to a renewed global focus on emission and climate change.
EV sales jumped 49% in the US and 42% in Europe in the first half of this year and over 60% in China in the first seven months of the year. Even beleaguered Tesla is helping accelerate the process as production of its US$35,000 mass-market Model 3 grows from just over 5,000 units a week currently to 6,500 a week by year-end. Just under 2% of all cars sold worldwide will be electric this year. The range for the -Tesla model S is now around 330km compared with 238km for the Chevy Bolt, General Motors or GM’s new battery EV. Moreover, the lack of charging infrastructure is increasingly a non-issue. The growing use of sensors together with increased connectivity of the vehicles is helping collect massive amounts of data which, in turn, is making the former pipe dream of driverless vehicles a reality. Autonomous driving currently restricted to just very basic driver assistance is moving to a new second level for makers such as Tesla and Audi.
Robo-taxis a game changer
Ride sharing companies such as Uber, Grab, Didi and Ola have combined connectivity and sharing as they try to build a business model for themselves. Toyota has linked up with Grab and Uber because it wants to collect data, not because it wants to sell more cars that run on petrol. Yet, Uber or Grab will not really start to make money until they also add the autonomous element by removing the driver from the equation. Robo-taxis will be the game changer for these companies.
Clearly, automakers competing merely on volume and brand will fade into oblivion in the new, shared, autonomous world. Consumers will soon no longer buy cars but rather miles or number of trips as the business models evolve into MaaS. Currently, US automakers earn a US$30,000 lifetime revenue from selling a vehicle. In future, although they would sell far fewer cars, they could potentially earn US$100,000 to US$200,000 in revenue from one car by charging per mile. They would earn probably a lot more in a subscription model where, instead of buying a US$30,000 car from Toyota Motor or Ford Motor, or a US$45,000 car from BMW, a customer like me might pay US$750 for a monthly subscription that allows me the use of a car for a few hours a day or a set number of miles a week. Most people buy with a car loan and, together with insurance and petrol, pay a lot more than what they might pay for a car subscription.
Already, GM in the US has Maven, a subscription service where you pay monthly or annually for the right to use a GM car and can switch models as you please. Subscription packages can be incentivised by bundling in free ride-sharing credit or car-rental minutes when commuting on public transport during rush hour, notes Juniper Research, a London-based research group, in a recent report.
Toyota, Ford and BMW may all need to cut production capacity because the world would need fewer cars as they fend off challengers such as Tesla, Apple and Google’s Waymo, but are likely to see their gross margins dramatically improve with the subscription and service model. RBC Capital in its recent “Megatrends” report suggests autonomous vehicles will expand the mobility market as they increase miles travelled by offering mobility to the young, elderly and disabled. They may also “steal” mileage from rail or short, regional flights.
Robo-taxis are no pie in the sky. Waymo, the pioneer in autonomous vehicles, is expected to launch a pilot driverless robo-taxi service for suburban Phoenix residents later this year. Commercial robo-taxi services are expected to be rolled out in multiple US cities including San Francisco within two years.
Even so, comprehensive MaaS is still four to five years away. For now, the focus is on what will happen at Tesla — whether Musk keeps control, brings in management expertise to help him through the current hump and into profitability, whether he needs strategic partners, and how US regulators, particularly the Securities and Exchange Commission, deals with him in coming weeks. Some analysts say the Tesla CEO could have breached Rule 10b-5 of the Securities Exchange Act 1934, which deals with false and misleading statements. He may also be in technical breach of Rule 14e-8, 13D corporate filing for listed firms as well as Regulation Fair Disclosure, which seeks to stamp out selective disclosure by listed firms. New Street Research analyst Pierre Ferragu says regulatory fines plus the cost of civil suits might run into tens of millions. Fines and any penalties in a civil suit would be paid by Musk, not Tesla, he notes. Even a US$50 million fine will be just a drop in the bucket for Musk, who is worth US$25 billion, according to Bloom-berg Billionaires. Much of his wealth is made up of not just his 20% stake in Tesla but also his controlling stakes in other ventures such as SpaceX and The Boring Co.
MaaS bet to pay off big time
I am no Musk fan boy and have never owned Tesla stock, but I can tell you that the short sellers are probably right and will likely make a lot of money in the short term. But Tesla, with or without Musk, has plenty of intellectual property, and a bet on Tesla is really a long-term bet on EVs, autonomous driving, connected vehicles and shared cars. Whether Musk stays at the helm, hands over the operational reins or gets out of business completely to focus on The Boring Co or SpaceX, a bet on MaaS will likely pay off big time for long-term investors.
Take Amazon.com, which listed in 1997. The e-commerce pioneer saw its stock plunge to a split-adjusted US$3.19 a year and half later only to surge again during the tech boom of late 1999 and 2000. In the aftermath of the bursting of the dotcom bubble, Amazon stock fell to US$5.97 as what was then just an online bookstore had trouble raising money from banks or venture capital firms. Yet, Amazon founder Jeff Bezos had amassed plenty of intellectual property as well as experience selling things online, which gave him the unique ability to build an e-commerce behemoth. If you had shorted Amazon’s stock 20 years ago, you would have made plenty of money as it fell to $3.19 or just before it plunged again four years later. But if you had bet on Bezos by buying the stock and held it for 20 years, a US$10,000 investment in late 1998 would be worth over US$6 million at Amazon’s current price, while a US$10,000 investment in 2002 would be worth US$3.27 million.
Before Tesla gets from here to its own -Amazon-like moment, Musk and his management team need to make sure that it becomes profitable by year-end which, in turn, will help the stock rise back to above the US$360 conversion price for its US$920 million in convertible bonds due at the end of February 2019. Most analysts are forecasting a small loss for Tesla in the current quarter with it turning a small profit in the final quarter of the year.
Investors hope Musk will not share Apple founder Steve Jobs’ fate and get booted out of his own company. “Tesla, much like Apple in the mid-80s, needs the visionary Musk to continue to push the company farther than we can imagine,” notes Nomura Instinet’s Romit Shah in New York. Musk is indispensable because he is a key part of the Tesla brand, he argues. “He excels at technology integration — software, electronics, and exotic materials — that is critical to Tesla’s product roadmap,” says Shah.
Veteran tech fund manager and ARK Invest’s chief investment officer Catherine Wood, a long-time bull and Musk fan, believes Tesla stock should be between US$700 and US$4,000 in five years. Her audacious price target assumes that “Tesla evolves from a hardware manufacturer currently with 19% gross margins to a company generating most of its profits from Mobility-as-a-Service”, a business that will enjoy 80% gross margins. “Our assumptions are conservative: We incorporate profits only from cars and certain autonomous taxi networks, not from trucks, drones, utility-scale energy storage, or the opportunity in China,” she says. And even that is after incorporating US$20 billion in dilution, which might be necessary to penetrate and scale key markets that Tesla is addressing.
It is unfortunate that Musk’s tweet on privatisation came just as Tesla was on the brink of turning the corner and barely weeks from profitability. Within the next few weeks, the narrative around electric and autonomous cars will switch from whether Tesla is producing 6,000 units a week of Model 3 or whether Musk is getting enough sleep, with or without Ambien pills, to improving cash flow and gross margins as well as its expansion in China with a battery Gigafactory and a plant to make electric cars there.
BMW has over 30% gross margins compared with Tesla’s 19% on its own Model 3. As -Tesla scales up, its gross margins will catch up and eventually exceed BMW’s because Tesla is making an electric car with far fewer parts and is software driven while BMW is a hardware company still steeped in the internal combustion engine. As the US-China battle over trade and tariffs moves into the next phase, do not be surprised to see Tesla get priority treatment in China. -Unlike GM, Volkswagen and BMW, Tesla is the only foreign car company with a licence to make cars there without having to take a local joint venture partner. That is because China is betting big on electric cars and it needs Tesla as much as Tesla needs access to the -Chinese market.
If, for some reason, Musk is ousted from Tesla or the company faces a short-term crisis, watch for companies like Apple, Amazon, even Uber, in concert with SoftBank Group or the Saudi sovereign wealth fund, to swoop in. Tesla and the broader MaaS are no longer a concept or a sexy investment theme; they are now a strong business model whose time has come.
Assif Shameen is a technology writer based in North America
This story appears in The Edge Singapore (Issue 846, week of Sept 3) which is on sale now. Subscribe here